Build America Bonds

Definition

Build America Bonds are a type of taxable municipal bond introduced by the American Recovery and Reinvestment Act of 2009 to help state and local governments finance public projects. These bonds allow issuers to receive a federal subsidy, making them more attractive to investors, as they can offer higher yields compared to traditional tax-exempt bonds while helping to stimulate economic growth and job creation.

5 Must Know Facts For Your Next Test

1. Build America Bonds were created during the financial crisis to help stimulate the economy by encouraging infrastructure development.
2. Investors in Build America Bonds receive interest payments that are taxable at the federal level, but they can benefit from a subsidy that covers a portion of the interest cost for issuers.
3. These bonds can be used to finance a wide variety of projects, including roads, schools, and water treatment facilities, making them versatile tools for municipalities.
4. The program for Build America Bonds was temporary and expired at the end of 2010; however, it helped pave the way for discussions about infrastructure financing in subsequent years.
5. They were especially appealing to institutional investors who were looking for higher yields compared to traditional municipal bonds.

Review Questions

• How do Build America Bonds differ from traditional municipal bonds in terms of tax implications and benefits for investors?
  • Build America Bonds differ from traditional municipal bonds mainly because their interest payments are taxable at the federal level. While traditional municipal bonds offer tax-exempt interest income, Build America Bonds provide a federal subsidy that helps lower borrowing costs for issuers. This structure attracts investors who are looking for higher yields, despite the taxable nature of the interest income.
• Discuss the role that Build America Bonds played in economic recovery efforts during the financial crisis and their impact on state and local governments.
  • Build America Bonds played a significant role in economic recovery efforts during the financial crisis by providing state and local governments with an additional tool for financing infrastructure projects. The federal subsidy made these bonds appealing, as it helped reduce borrowing costs and incentivized investment in public works. This resulted in job creation and stimulated economic activity as governments invested in critical infrastructure improvements.
• Evaluate the long-term implications of using Build America Bonds as a model for future infrastructure financing in the context of evolving economic challenges.
  • The use of Build America Bonds highlighted innovative financing strategies that could address long-term infrastructure needs amid evolving economic challenges. By providing a federal subsidy, these bonds demonstrated how public-private partnerships can be structured to attract investment in essential projects while managing fiscal constraints. Future infrastructure financing may draw upon this model, adapting it to incorporate both private capital investment and public subsidies to enhance project viability and sustainability over time.

Related terms

Municipal Bonds: Debt securities issued by states, municipalities, or counties to finance public projects, typically exempt from federal income tax.

Tax Credit: A dollar-for-dollar reduction in the amount of income tax owed, often utilized in conjunction with various types of bonds to incentivize investment.

Subsidy: Financial assistance granted by the government to support an economic activity or project, such as the federal subsidy provided for Build America Bonds.